Stephen Ashcroft posted on Supply Management on the topic of ‘high risk’ procurements.
According to the media, most procurements these days are ‘high risk’. Stephen captured a number of key points, setting out some common weaknesses in many procurements. For example, he starts by highlighting the need for good quality specifications. Our research at IACCM shows that the main cause of disputes is due to poor specifications or scoping. This will only be avoided if Procurement acts as a facilitator of discussions between users and the business, rather than as a barrier. It must also ensure proper documentation of whatever is agreed and recognise that requirements are likely to change – so facilitate that within the contract.
Next he focuses on selection. What are the important characteristics you want from your supplier? If you select on price alone, you will have a relationship that reflects this principle. Don’t expect quality, value, flexibility, innovation because nothing you said or did suggested those were important – and the price does not allow them. If they were important, you should have established different selection criteria.
And as for contracts, another of his areas for focus, a high proportion of the templates used by Procurement have little relationship to the bid or the desired outcome. Many Procurement groups really do not understand contracts or their role. They accept templates provided by Legal that are based on risk allocations, not on outcomes. Far too many Procurement groups consider the contract to be an administrative requirement, rather than a critical tool in performance definition and management. So it is hardly surprising when results are disappointing.
But never mind. Lost savings this time round can be claimed all over again with the next Procurement!
“It Only Takes Seconds To Lose A Customer” is the title of a recent blog on Successful Workplace.
Citing the work of Vivek Ranadive, the article emphasizes the importance of empowering the customer interface to answer questions rapidly and accurately – or risk losing a sale. It is not just a matter of customer impatience; it is also about credibility and perceptions of competence.
I recall research that I encountered some years ago to support this point. It related to Chief Financial Officers and examined factors that made them trust information. When asking for data, they were profoundly influenced by the time it took to provide an answer. I forget the precise statistic, but the tolerance level for delay was low – and the longer it took, the less faith they had in the eventual answer.
This supports Ranadive’s point that “A little bit of the right information just a little bit beforehand … is more valuable than all of the information in the world six months later”. Throughout my career, I have witnessed this point – and the fact that delays not only reduce the value of information, but also typically result in increased demands and expectations.
The application of this ‘need for speed’ is evidently important for the world of contracts and commercial management. Indeed, the principle complaint about Procurement, Legal and Commercial functions is that they slow things down. They are knowledge and information roadblocks.
But in an increasingly complex world, surrounded by a multitude of risks, can we really ‘empower’ the sales interface? We all know their propensity to exaggerate, to give false or incomplete information … And with the growth of interactive technologies, the number of people who interface with the customer has grown, so the challenge of empowerment extends far beyond the sales representative.
Commercial and Legal groups are becoming steadily busier as the demands for support grow. Their current model of operation is not sustainable. They must start to work on new and better structured approaches to supporting and enabling the business. This means steps such as codifying information, segmenting the areas of information need, providing remote access via technology, developing apps for mobile devices. To get started, they must begin to analyze the nature of the topics and issues on which information is needed; this means ending the idea that every situation is unique and seeking patterns for sales enquiries and customer issues.
‘The 2 second advantage” is a powerful concept – and it is something we really must take to heart. Today would be a good day to start.
Research shows that a majority of people dislike contracts because they cannot understand them.
When you think about how important a contract can be – the effect it can have on people or their business – this is quite an indictment. Surely it must be in everyone’s interests to produce contracts that are clear and offer a useful source of guidance.
Regular followers of this blog and of IACCM will be aware of the support we are giving to the proactive law movement and its work to encourage more useable contracts. Their campaign continues with an excellent article published by the Cornell University Law School. This sets out much of the background and history related to the use of visualization in contracts and the growing role of Information Designers.
As the article points out: “Lawyers are communication professionals, even though we do not tend to think about ourselves in these terms. Most of us give advice and produce content and documents to deliver a specific message. In many cases a document — such as a piece of legislation or a contract — in itself is not the goal; its successful implementation is. Implementation, in turn, means adoption and action, often a change of behavior, on the part of the intended individuals and organizations.”
With a growing number of examples from which we can draw, there is no good reason why contracts professionals should not be leading the charge to improve the quality of contracts. Indeed, if we could make them easier to understand, many people might start to like contracts – and think what a pleasant knock-on effect that could have for the people who write them!
IACCM research identified a 20% increase in the frequency of claims and disputes last year. The reasons for this are becoming steadily more apparent.
The ‘boom and bust’ cycles of the economy are inevitably reflected in business behavior. Anyone in Contract Management or Procurement is only too well aware of the swings between laissez-faire pursuit of growth and the stringent push for tight controls and cost reduction.
But current conditions are different. Past downturns in the economy have typically been accompanied by relatively short-term measures. The prolonged nature of this downturn – now into its fifth year – is resulting in more sustained action. Businesses face the twin challenge of maintaining or growing revenue and maintaining or growing margin. The former points to the need to enter new or more risky markets; the latter depends on a combination of cost reduction and extracting greater value from existing contracts.
As highlighted in previous blogs, these conditions have led to a new level of appreciation for the importance of contract and commercial management, both buy and sell. One area for particular focus is post-award contract management. The old perception of ‘administration’ is fast giving way to a far more proactive – and aggressive – pursuit of value.
In the case of Procurement contracts, this may mean either ensuring that anticipated savings are realized, or alternatively a greater focus on decommitment in situations where needs have changed. For those overseeing Sales contracts, there is particular pressure to protect and grow revenue, which means preventing no-charge scope creep and seeking compensation for changes.
The potential for conflict and disagreement is obvious and therefore the greater frequency of claims and disputes should not be a surprise. The real question is therefore ‘What next?’ Will organizations continue to invest in confrontation, or will they start to explore ways to avoid the need for claims and disputes?
Periodically, companies ask whether there are good examples of b2b loyalty or ‘preferred customer’ programs.
The question seems mostly to arise when and organization is struggling to achieve differentiation. Facing an erosion of their negotiation a power and influence, they wonder whether they can achieve heightened status through ‘preferential’ terms and conditions.
This approach always seems to run into problems. One is the difficulty of segmenting customers. A public program carries significant risk; for example, will a ‘gold’ customer feel especially flattered and how will you explain to a ‘bronze’ customer why they are receiving worse service – and why they shouldn’t move to one of your competitors?
A second challenge is usually to identify tangible benefits for the high-status customers. They have already pushed you on price and risk – that is usually why the program is being considered. So what do you offer next?
It seems to me that loyalty programs in the business to business environment are a sign of desperation. Essentially, they are an admission that the company has no real distinguishing value and is struggling to develop a coherent approach to marketing and market segmentation.
Strategy+Business recently carried an update on the debate over whether globalization is creating ‘a flat world’ or whether the forces arguing that this is ‘globaloney’ have the upper hand.
The article is relatively inconclusive, pointing to merits and weaknesses in both arguments. At IACCM, right from the time Thomas Friedman’s famous book “The World Is Flat” was published, we argued that Friedman’s perspective was too narrow and simplistic. Back in 2005, we suggested that the correct depiction would be of a ‘spiky world’, where global technologies are in some respects shifting worldwide behavior and attitudes, yet at the same time they are accentuating and making differences more visible.
Interestingly, many of the patterns of today’s international challenges are fundamentally unaltered from those which have prevailed throughout recorded human history. It is actually a story of wealth creation, empire and exploitation. Trade, not politics. has been the consistent force that has both united peoples and driven them apart. Take any empire and you will discover that it was the merchants, not the military, who were driving expansion.
This is very true today. Modern technology has enabled a new form of outreach, where businesses can penetrate to almost any corner of the world – often without the need for any physical presence. Yet such outreach is threatening to the local power sources. It challenges underlying cutlural beliefs and threatens new influences. The very technologies that enable this penetration can then be used by those who oppose it to carry their ‘war’ to the heartland of their enemy. ‘Globalization’ today means that a US general can sit in his chair in the Pentagon and press buttons that rain remote destruction onto any part of the world. At the same time, the ‘forces of terror’ can establish worldwide networks and strike anywhere, anytime.
It is ironic that trade operates in this dual fashion, both unifying and dividing people around the world. Yet there can be no question that the last 10 years has witnessed a dramatic and continuing shift in global power balances. The latest Forbes Global 2000 analysis of the largest companies illustrates this. Back in 2004, 43% of the companies on this list were based in the Americas. Today, that percentage has reduced to 32%. In contrast, Asia has grown from just 28% to 37%. And ‘sick man’ Europe has – interestingly – grown from 29% to 31% – though it hit a peak of 33% in 2008 and is on the decline.
In the end, historical analysis suggests that overall trends and behaviors have not actually changed all that much. It is the relative speed and the methods through which change occurs that have fundamentally altered. But in that sense, ‘global networked technology’ is just the latest advance in human communication techniques. Before this, the invention of writing, ships, road transport, airplanes, the telegraph were also transformational in how and where trade could be conducted. And each of these had an impact on the need for – and content of – documented contracts and terms and conditions. So keep writing!
Many organizations develop contract templates or standards as a way to impose internal controls. However, few have undertaken analysis to determine the impact on external relationships or contract effectiveness.
The questions that IACCM sought to answer were two-fold. First, do templates in general have an impact on customer or supplier relationships and second, is there any evidence that the approach to development and maintenance of the templates alters this impact?
An obvious place to start our investigation was to look at cycle times. We know from extensive benchmarking that the bid-to-contract cycle times vary substantially between organizations, up to 400% for some contract types. It seems obvious that the existence of a standard template should reduce the time it takes to put contracts in place. Our findings were interesting. While the top quartile performers in terms of cycle time (bid-to-contract) almost universally use templates, so do many of the organizations in the second and third quartile. However, the nature of the templates proved to be significantly different.
The leading companies develop and maintain what we term ‘market-based’ templates and they also tend to have pre-approved fall-back or alternate terms. Their focus is on ensuring proposed terms are appropriate to the customer or supplier – for example, that they reflect industry practices, regulatory needs and are attuned to the specific product or service under consideration. In addition, via their pre-established term alternates, they significantly speed the process of negotiation, sometimes through empowering the customer interface, sometimes through simply accelerating internal review.
The ‘laggards’ are those who develop templates purely as a method of internal control. They generally lack an established process for periodic review and update of the templates and almost none have developed term alternates or fall-backs. Their attitude is often driven by perceived market power and a wish to impose greater risk onto their supplier or customer (these template approaches are particularly common among buyers). Their cycle time performance was only marginally better than the organizations which had no templates at all and operated on a case-by-case review model, generally based on the counter-party’s template.
Ultimately, does this matter? The answer is yes. Cycle times certainly impact the attitude of the business towards its Legal, Procurement or Contract Management groups. Faster closure is obviously important, whether because of time to revenue, time for product development and availability, time to savings or as a source of competitive advantage. It encourages internal compliance. Organizations with market-based templates suffer a lower level of non-compliance.
But perhaps the most telling statistic was our discovery that the nature of the templates also impacts the frequency of subsequent claims and disputes. Market-based templates have the effect of reducing disagreements by 8% – 18%, reflecting significantly more harmonious relationships.
In summary, the analysis suggests that contract templates definitely create value – so long as they are the right form of template. There is plenty of room for further research in this area, to look at more detailed impact on areas such as margin, savings or innovation.
The IACCM report on contract templates is available in the member library at http://www.iaccm.com.